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Austin made headlines in 2021 for being “the place” for startup founders and venture capitalists alike to set up shop. That’s why TC has chosen to shine a spotlight on the city with a special episode of TC Live centered on the growing startup scene in Austin, Texas.

As Austin’s skyline expands, the city continues to solidify its standing as a tech hub. And the numbers are there to back it up.

VCs invested over $5.5 billion across 412 deals in 2021, more than double the amount of capital invested in 2020, according to PitchBook data. Rounds are getting larger, too, signaling a further maturing of the market: All of the top 10 deals for Austin in 2021 amounted to $100 million or more.

Today, Austin is more than just the capital of Texas. It’s a city of unicorns and tech giants.

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TC Live is a free weekly event featuring investors, founders, and startups with the goal of helping entrepreneurs build better venture-backed businesses.

Several companies surpassed a $1 billion valuation in 2021, including The Zebra, Firefly Aerospace, Abrigo, ZenBusiness and Iodine Software. SparkCognition achieved unicorn status earlier this year while ICON recently raised $185 million in a Tiger Global-led round that valued it at “nearly $2 billion.” In 2020, Tesla settled into the so-called Silicon Hills district and Oracle moved its headquarters from Silicon Valley. Austin is also home to secondary offices of many of the largest tech companies in the world, including Google, Apple, Oracle, Amazon, Facebook and SpaceX.

Venture capitalists from both coasts are also increasingly drawn to the city. A number of investors now call Austin home after relocating from the Bay Area and New York City. They include Jim Breyer of Breyer Capital and Palantir co-founder Joe Lonsdale, who said last year he was moving his venture capital firm, 8VC, from Silicon Valley to the city, and Geoff Lewis, founder and managing partner of Bedrock Capital.

Austin wasn’t an overnight success. For years it was known primarily for its software scene — in addition to being the live music capital of the world. But today, new growing sectors include crypto/web3, real estate tech, CPG and insurance technology. As in other maturing markets, companies that have seen success in the past are now spawning a new generation of entrepreneurs as well as attracting others from various locales.

Drawn to the laid-back lifestyle and lower cost of living — relatively speaking — nearly 185 people are moving to Austin on a daily basis. Many of those people work in the tech industry, and many are moving from California.

The Texas capital is home to more capital

Bullish investors have more money than ever to deploy. In 2022 alone, so far, two Austin-based venture firms have announced significant raises in the city — the most recent being Next Coast Ventures. That firm, founded in 2016, announced on March 29, 2022 that it closed $310 million in capital across three funds. Earlier in the month, S3 Ventures raised $250 million for its Fund VII, touting itself as “the largest venture capital fund focused on Texas-based startups.” S3 Ventures founder and managing director Brian Smith notes that when he started the firm in 2005, venture capital in Texas was finally starting to recover from the dot.com bust. At that time, most VC activity was dominated by the now-defunct Austin Ventures and Sevin Rosen Funds.

“Fast forward a few more years, and both AV and SRF had started to wind down. A small crop of mostly sub-$100 million funds appeared, several founded by former AV GPs,” Smith recalls. “Jump to today and those new Texas-focused firms, including ours, have raised multiple funds with the latest ones well over $200 million. Additionally, we have seen several national firms move their HQs or a regional team here. While they are not primarily focused on Texas, they are starting to invest locally, as well.”

This means, he adds, that founders have a broader set of choices for capital partners.

Notably, S3’s investment thesis is focused on Texas. As such, the vast majority of the investments will be in companies headquartered, or with a sizable presence, in the state. It makes initial investments in companies at the seed, Series A and Series B stage and can invest $20 million-plus over the life of a company.

Chris Shonk, co-founder and managing director of ATX Ventures, said his firm is unique in that “everyone” there is both technical and has operating experience.

“ATX will be the first midcontinent VC to have top decile performance two funds in a row,” he told TC. “It is a true reflection of the vibrancy in the Texas ecosystem and having an operator approach at early-stage VC.”

Shonk has also witnessed the change in the dynamics in the city’s startup scene as it has matured over the years.

“Historically Austin over-indexed on founder and C-suite talent but under-indexed on experienced junior talent who had worked at large tech companies and venture-backed unicorns,” he said. “That has now changed and Austin has an ample market of CXO-executive, VP and junior talent who have VC-backed experience.”

Mike Smerklo moved to Austin from Silicon Valley in 2016 to start Next Coast Ventures with Tom Ball.

“I had spent over 17 years working in the Valley as an entrepreneur and loved every minute of it.  However, I felt that a lot — but not all — of what made the Valley so amazing was replicable,” he told TC. “ … What really convinced me to move here and start Next Coast was the evidence of several key factors that make a great startup ecosystem —  a strong entrepreneurial culture, great university systems, successful technology companies and an amazing place to live — exist in Austin. All that was needed was more capital to support it.”

Morgan Flager, managing partner of Silverton Partners — one of the state’s most active investors — believes that Austin has finally gotten respect “as a legitimate top tech ecosystem.”

Sixteen years ago, he said, people questioned his move from Silicon Valley to Austin to join Silverton Partners.

“LPs asked me if we, or anyone else, could build a top-tier VC firm here and doubted if Austin could produce billion-dollar companies with any regularity. Entrepreneurs wondered if there was enough capital and talent in Austin, and later-stage investors questioned how much time they should spend in Texas,” Flager recalls. “Now, those questions have largely been answered and been replaced by different, larger questions — like will Austin ever surpass Silicon Valley? In short, we’ve gone from aspiring to be a market that matters to being the hottest tech city in the country.”

Meanwhile, the area has long had a strong base of angel investors funding companies at the very early stage. The Central Texas Angel Network boasts over 110 members, and its website says that its members have pumped $120 million into nearly 200 startups since its 2006 inception.

Marc Nathan, who publishes the weekly Texas-Squared Startup Newsletter, points to a robust angel community that includes serial entrepreneur and data.world CEO and co-founder Brett Hurt, Andrea Kalmans of Lontra Ventures and Justin Siegel, among many others.

Says Shonk:

The angel scene in Austin has always been vibrant. It has recently been amplified by the number of newly established family offices — largely from the real estate, energy and financial services boom — looking to test their skills at making direct investments. Also a number of coastal funds have deployed scouts to help address Bay Area talent flight to Texas so they now have lines in the water as well.

Comparisons to Silicon Valley

Speaking of Silicon Valley, nearly everyone working in tech in Austin is growing weary of hearing about comparisons to it. The overarching belief is that Austin is its own, unique market and that it will not, and should not, be a carbon copy of Silicon Valley.

Having said that, there are also many commonalities between the two — culturally and aesthetically. Both have lots of green and rolling hills. Both boast outdoor lifestyles and a physically active population. And, of course, both are home to innovation, from universities, startups and Big Tech alike.

Like Silicon Valley, Austin is seeing reinvestments from successful founders. Brett Hurt is an example of a successful founder who continues to help the city’s startup scene flourish by also acting as an active angel investor.

With four exits and over 120 angel investments under his belt, Hurt is vocal about his passion for angel investing, telling TC: “It was not all that long ago that entrepreneurs in Austin often had to strongly consider picking up and moving to Silicon Valley to successfully court venture capital and angel investors — but a lot has changed in the past few years. In fact, in many cases, we’re even seeing the opposite happen. Today, Austin’s angel investing space is incredibly robust.”

In fact, Hurt’s family office, Hurt Family Investments, was one of the first investors in 77 Austin-based startups, including several unicorns such as Everly Health and ZenBusiness.

“We are always looking for new opportunities, especially in SaaS, to help continue the momentum in our exciting local ecosystem,” he added.

Former Bay Area resident Smerklo believes that Silicon Valley will remain the center of technological innovation for “a long time.”

“I don’t try to compare Silicon Valley with any other region — Austin included,” he said. “Doing so is a bit like trying to compare New York City with Hong Kong. They are different and that is okay. I think the better view is that the global nature of technology supports several great geographic pockets where innovation and entrepreneurship can flourish.”

Flager grew up in Silicon Valley and acknowledges that the two have some similarities.

“The growth and energy in Austin feels like Silicon Valley in the ‘90s,” he said. “The diversity of talented people moving here is also reminiscent of the Valley.”

But, in his view, the two have notable differences. For one, state and local governments in Texas are focused on pro-business policies, Flager said, while California has been criticized for not being a business-friendly environment. Indeed, the lack of state income tax in Texas and a willingness on the part of government officials to offer generous incentives have been a draw for many companies.

Culturally, Flager believes that overall, attitudes differ as well. Austin is often described as a tech community where founders support each other rather than compete. Techstars Austin Managing Director Amos Schwartzfarb agrees. “I think one of our biggest strengths is what a wonderfully collaborative city Austin is,” he told TC. “It’s very unique in how everyone really wants and helps everyone around them be successful.”

In Austin, for example, you will still see cheers and enthusiasm for funding rounds that would not elicit more than a yawn in Silicon Valley.

“It’s a political climate where freedom of thought is rewarded and everyone can feel welcome,” Flager added. “We have to remember what got us to this point and that’s humility and kindness, not pretense … Somewhere along the way, Silicon Valley seemed to let some of these things slip away. Perhaps some people there thought it was too big and important to stumble or regress — I guess we’ll see. I hope Austin never forgets what got us here.”

Schwartzfarb also tires of the comparisons, noting that people outside the city are “constantly” comparing Austin to Silicon Valley. But here in the city? Not so much.

“As a city, community and ecosystem, we do not make that comparison. We are uniquely our own thing on our own path and I think when others make that comparison it creates an incorrect mental image of what Austin is,” he told TC. “The valley is unique and nothing like it has or will ever exist again. And similarly, in a very different way, Austin is unique, nothing is like us and nothing has or will ever exist again quite like us.”

Lots of growth, little diversity

The massive growth Austin has seen has brought some significant challenges as well. The city’s infrastructure has struggled to accommodate the influx of people and that is evidenced by the widespread traffic jams. Also, folks moving to town and buying up houses in cash have driven median housing prices up by over 40% in 2021 alone.

This means that many people and families are being priced out of the city and having to move out to surrounding areas, such as Round Rock, Cedar Park, Leander, San Marcos and Buda. The lack of affordable housing has also contributed to the dramatic increase in homelessness.

Still, the median price of a home in the Austin metro area of just under $500,000 remains significantly lower than the current $1.4 million median home price in San Jose, California, for example.

While Next Coast’s Smerklo raves about many things about Austin, from its engineering talent to angel networks to music and breakfast tacos, he also acknowledges that there are weaknesses around growth management and infrastructure.

“The infrastructure is the real challenge as the city has historically not supported investments to match the growth,” he said. “There are several projects underway that will help, but we need to do more to make this an affordable, enjoyable and easy urban environment that works for everyone.”

Other situations that have come up also mirror those that plague San Francisco. Decades ago, Austin was known more for its laid-back vibe and charm that inspired the “Keep Austin Weird” slogan. These days, many of the small businesses that gave us that charm have had to shut down due to rising property taxes or rents and are being replaced by shinier, often upscale and cookie-cutter establishments.

But perhaps the biggest, and most enduring, challenge the city faces is its lack of diversity. Austin is known as the most progressive city in Texas, but some argue that progressiveness is not always consistent and depending on the issue, it can be as backward as some other parts of the state. The city may claim to be welcoming, yet the percentage of Black residents, for example, has steadily decreased over time to an estimated 7% in 2020. Many of Austin’s neighborhoods resemble those seen in Silicon Valley with largely white and Asian residents and far fewer Hispanic and Black people.

S3 Ventures’ Eric Engineer believes that Austin’s greatest strength lies in that it is a place people of all types want to live. And many of those people, he says, are drawn to the city’s “welcoming, meritocratic and free-thinking culture.” As mentioned above, still others are attracted to the business-friendly environment and attractive tech jobs.

“At the same time, Austin has real, but surmountable, challenges related to cost of living, transportation, homelessness and diversity,” he told TC, “which have the attention of our leaders and voters — with several key investments already underway.”

For example, while nearby Houston has a bad rep for being an unattractive, sprawling city with heavy traffic, it boasts the most ethnically diverse population in the nation and has for several years.

Engineer grew up in Houston and then lived four years in Dallas before spending the last decade in Austin.

“From my perspective, Austin appears less diverse and more segregated than the other two — though that is visibly changing,” he said.

So what does one do if they’re trying to boost diversity in a city that is not known for its diversity?

For Preston James, it was to help start DivInc — a nonprofit that aims to bridge the gap between underrepresented entrepreneurs and the resources they need to build profitable, high-growth companies — in 2016.

Today, he notes, Austin is home to an “insane talent pool” and several new emerging funds exclusively focused on Black, Latinx and women founders, including BEAM, The Fund, New Type Ventures, Agave Fund, Silicon Hills Capital and True Wealth Ventures (which was considered the first of its kind in the city).

While James is excited about all the venture activity taking place, he wonders how much is going to underrepresented founders and women.

“We have to be proud enough in our achievements to also acknowledge where we’re still falling short too, especially for underestimated founders,” James said.

Still, he believes that while Austin still has “a long way to go in improving diversity,” there are rarely quick fixes to historically systemic racial and gender equity issues in our society.

Some ways to help move things along, in James’ view, are for existing funds to be willing to fund “a lot more diverse founders early — often and equitably at the pre-seed and Series A stages.”

He also thinks the city needs to be home to more emerging funds focused on investing in underestimated founders.

“This will help build the pipeline of unicorn companies with diverse founders. In addition, these emerging funds will also create a pipeline of potential diverse VC partners for traditional VC firms,” James said.

He also believes all the Big Tech companies could be doing more with their environmental, social and governance (ESG) initiatives, such as making more grant investments with a special focus on supporting underrepresented founded companies and organizations like DivInc “that provide strong programming and support systems for them.”

Sam Haytham, founder of Austin startup Kiro Action, says he is painfully aware of the lack of “brown and Black” diversity in the startup scene. Haytham is not currently seeking venture money but when he does, he expects it to be a more difficult process than that of many of his counterparts.

“I think the opportunities for diverse founders are very limited,” he told TC. “When you look at VC groups, they’re very male and very white. And if you want to get funded, and are white and male, you can get funded even before you have an idea.”

“Meanwhile, diverse founders are literally sitting there scratching to get every little bit to push their product to market. It’s even more difficult for minority and women founders with the funding systems in place,” he added.

For now, Kiro Action — a recent SXSW pitch winner —  is self-funded and focused on addressing two of the biggest problems that Austin faces: homelessness and affordable housing.

“Our true business is social good, where the housing can be used for general/veteran homelessness, sheltering refugees and migrant farm worker housing,” Haytham said. “The same product can be used to fill multiple social good and consumer needs, ​​including crisis response housing for insurance companies, pop-up hotels and backyard flex space for consumers.”

Maria Miller, co-founder and COO of venture-backed Spot, moved to Austin after commuting between New York and Dallas.

“I found Austin to be a great balance of art, entrepreneurship and people,” she said. Miller co-founded Spot Insurance, a health insurance tech startup, in 2017. The startup offers injury insurance to protect against unexpected medical expenses, has raised over $23 million in venture funding and is on track for 500% growth this year, according to Miller.

To Miller, the lack of diversity that may exist in Austin is not exclusive to the city and has not taken away from the support she has received as a founder.

“I believe there is a lack of minority and women founders everywhere,” she told TC. “Our founder community in Austin is incredibly supportive, everyone always willing to make an introduction to talent or investors, sharing the ups and downs and allowing a level of vulnerability I haven’t experienced elsewhere.”